R.G. Niederhoffer is a hedge fund, based in New York, headed by Roy Niederhoffer. The fund’s programs from largest to smallest, Diversifed, Trend-Hedge, Optimal Alpha, Negative Correlation, and iHedge Inflation Protection, have returned 10.4%, 10.9%, 13.4%, 8.6%, and 8.4% respectively for the month of June thought the 26th.
The flagship hedge fund, Diversified Program has returned 9% annually since inception in 1995. In 2008, when the S&P was down 38%, the hedge fund returned a whopping 50%.
R.G. Niederhoffer studies some of the new metrics at play in the current market reality. Their analysis points to some surprising conclusions on the way in which the market has been moving so far in 2012.
There has been much speculation in recent months about the way in which the equity markets are changing in response to stimuli in the post financial crisis world. The realities of the new environment include impossibly low returns on Treasury bonds, and massively increased regulation, among other things.
Niederhoffer has over $550 million in assets under management between those five funds. They have returned, -0.7%, 2.7%, 4.2%, -0.4% and -0.7% for the year through June 26th, in descending order of program value.
The major trend discussed in this information from the firm is the lack of correlation between realized volatility and equity prices in the market place. In ordinary circumstances, large decreases in asset prices result in increases in volatility. That is changing.
In may the S&P 500 dipped 6.3%, while volatility dropped by 15%. In Europe the problem is magnified, a drop of 6.9% on the Eurostoxx index resulted in a decline of 28% in volatility. The low volatility is derived from the lack of significant drops on any one day.
Through May, the worst day in trading on the S&P 500 in 2012 was a drop of 1.7% on April 10th. The lack of volatility in the market means that hedge funds are having a harder time realizing their gains. The ordered nature of sell offs means there is not as much benefit to acting quickly.
Roy points to a second way of looking at the trend. It can be seen as a flattening of the tails of a bell curve depicting market losses. For the year through May there have been no days in which the S&P 500 gained, or lost, more than 2%. 81% of days showed losses, or gains, of less than 1%.
The startling move toward the centre in the market means that the amount of risk involved in equity investment has declined. The return declines along with that metric. There simply have not been any significant trading days so far this year.
Other changes noticed in the market’s movements have been a growth in the volume of trading in US markets, investors are coming to question the helpfulness of trading on headlines, and there is higher market continuation rather than market reversal.
Of these three the second is the most interesting. Headline risks have driven the market for at least eighteen months, a reduction in that power would have huge ramifications.
Volatility in the equity market is down, and, despite losses, seems willing to stay that way. Investor will have to find new ways to absorb value in calmer market conditions in order to maintain appreciable return on their capital.